TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION

This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.

Highlights of Reference Number: 2013-30-051 to the Internal
Revenue Service Chief, Criminal Investigation.

IMPACT ON TAXPAYERS

Tax
fraud is a deliberate and purposeful violation of Internal Revenue laws by
those who do not file and properly report their income and expenses. When
criminal fraud is not timely pursued, it can undermine the IRS’s deterrence
efforts. In addition, breakdowns in fraud investigation procedures can result in
contact with the taxpayers that may potentially jeopardize Criminal Investigation’s
(CI) ongoing investigations.

WHY TIGTA DID THE AUDIT

Tax
fraud is one of the most egregious forms of noncompliance. The overall
objective of this review was to evaluate CI’s role in the IRS National Fraud
Program’s efforts to increase the number of viable fraud referrals. This audit
is included in TIGTA’s Fiscal Year 2013 Annual Audit Plan and addresses the
major management challenge of Tax Compliance Initiatives.

WHAT TIGTA FOUND

Fraud
referrals made to CI in Fiscal Year 2012 have increased. This has subsequently
resulted in an increase in the number of subject criminal investigations and
prosecution recommendations. In addition, CI special agents provided thorough written
feedback to the referring operating divisions when they rejected the referrals.

However,
the reliability of data CI used to determine the timeliness of evaluating fraud
referrals is questionable. CI management did not have complete or accurate
information available to make decisions because CI used incorrect and/or
inappropriate data when analyzing its timeliness performance measures. In
addition, management did not establish goals for CI’s timeliness measures. Furthermore,
CI employees did not always ensure that criminal investigations were timely
controlled on the Master File.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the IRS 1) stress the importance of capturing correct fraud
referral processing data, 2) modify the management information system or
develop an alternative method to accurately calculate the fraud referral
evaluation period, 3) establish goals for the fraud referral timeliness
performance measures, 4) strengthen procedures to ensure that the criminal investigation
code is timely input, and 5) issue a reminder to periodically review reports to
ensure that the code is input timely.

In
its response to the report, IRS management agreed with four of the five recommendations
and has taken or plans to take corrective actions. IRS management partially
agreed with Recommendation 3. Although IRS management did not agree to set a
percentage goal for the performance measure, their commitment to the policy of
addressing each fraud referral within the specified time frame is acceptable
and will help to ensure that fraud referrals are expeditiously reviewed.

This report presents the results of our review to evaluate
Criminal Investigation’s (CI) role in the Internal Revenue Service (IRS) National
Fraud Program’s efforts to increase the number of viable fraud referrals. In
addition, we determined whether fraud referrals were timely assessed within CI
and whether sufficient feedback was provided to the operating divisions on
rejected fraud referrals. This review was conducted as part of our Fiscal Year
2013 Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.

Management’s complete response to the draft report is
included as Appendix VI.

Copies of this report are also being sent to the IRS
managers affected by the report recommendations. If you have any questions,
please contact me or Augusta R. Cook, Acting Assistant Inspector General for
Audit (Compliance and Enforcement Operations).

Tax fraud is a deliberate and
purposeful violation of Internal Revenue laws by those who do not file and
properly report their income and expenses. Tax fraud requires both an
underpayment and fraudulent intent. It is one of the most egregious forms of
noncompliance.

Criminal Investigation’s (CI) primary mission is to
investigate potential criminal violations of the Internal Revenue Code[1]and related financial crimes
in a manner that fosters confidence in the tax system and compliance with the
law. The CI Fiscal Year 2012 Annual Business Plan includes a recurring
commitment that focuses on the delivery of high-impact, high-quality tax fraud investigations
by working closely with the other Internal Revenue Service (IRS) operating
divisions. The compliance, business, and communication strategies of CI
include maintaining focus on legal source income tax investigations and
partnering with the other operating divisions to support a successful Fraud
Referral Program.[2]

The primary objective of the National Fraud Program is to foster
voluntary compliance with Federal tax laws through the recommendation of
criminal prosecution and civil penalties against taxpayers who attempt to evade
the assessment or payment of taxes due.

The primary objective of the IRS National Fraud Program is
to foster voluntary compliance with Federal tax laws through the recommendation
of criminal prosecution and/or civil penalties against taxpayers who attempt to
evade the assessment and/or payment of taxes due. The IRS National Fraud Program
Office provides oversight and direction for fraud referrals throughout the IRS.
The Program Office is part of the IRS’s Fraud/Bank Secrecy Act Office within
the Small Business/Self‑Employed
Division.

Oversight of the fraud program includes providing training
to the various operating divisions and assisting in the development of fraud
referral leads. The Program Office staff has the primary role of coordinating
fraud referrals from the operating divisions to CI, monitoring program accomplishments
and trends, resolving IRS‑wide fraud issues, and improving policies and
procedures related to the detection and deterrence of fraud. National Fraud Program
Office Fraud Technical Advisors (hereafter referred to as advisors) are
responsible for providing procedural fraud advice to operating division
compliance employees, as well as helping to identify and develop potential
criminal fraud referrals and civil fraud penalty cases.

The Internal Revenue Manual (IRM)[3]requires
that a fraud referral be developed in the operating division when an advisor
determines that a case includes firm indications of fraud and established
criminal criteria are met. Although not all inclusive, examples of
fraudulent criminal activities committed by individuals, businesses, and/or tax
return preparers that are considered violations of the tax law include:

Deliberately underreporting or omitting income.

Overstating the amount of deductions.

Keeping two sets of books.

Claiming personal expenses as business expenses.

Claiming false deductions.

Hiding or transferring assets or income.

The fraud referral is submitted to
the respective CI field office using Form 2797, Referral Report of Potential
Criminal Fraud Cases. CI procedures require that the date the fraud
referral is received by the CI field office be noted on the Form 2797 and
entered in the initiation date field in the Criminal Investigation Management
Information System (CIMIS). The fraud referral is then assigned to a special
agent, who should schedule an initial conference with the referring compliance
employee and the advisor within 10 workdays to discuss the fraud
referral’s merits. After this initial meeting and upon further research, CI
must then make a decision whether to accept or reject the fraud referral, i.e.,
the disposition of the referral, within a total of 30 workdays from the fraud
referral’s receipt.

Sometimes, CI will not pursue a
criminal investigation based on the fraud referral. Reasons for rejecting
fraud referrals include:

Insufficient evidence.

Lack of jury appeal.

Lack of willful intent by the taxpayer.

The taxes owed are not cost effective to pursue a criminal
investigation.

If the fraud referral is rejected, the date the rejection decision
was made is entered in the disposition date field on
the Form 2797 and in the closed status date field in the CIMIS. The special
agent writes a declination memorandum, which is provided to the referring
operating division’s advisor and compliance employee, detailing the reasons the
fraud referral was rejected. Compliance employees in the referring operating
division are then to resume normal case processing with consideration given to
the application of a civil fraud penalty.

If CI determines that there are
sufficient tax issues to accept the fraud referral and upgrade it to a Subject Criminal
Investigation, the date this decision is made is to be entered on the Form 2797
in the disposition date field. The CIMIS is then to be updated to reflect the
acceptance of the fraud referral and the start of the Subject Criminal Investigation.

Figure 1 provides an overview of the fraud referral process from
the identification of fraud indicators by compliance employees in the operating
divisions through the evaluation of whether the fraud referral is accepted or
declined as an investigative case in CI.

Figure 1: Criminal Fraud Referral Process

Figure 1 was removed due to its
size. To see Figure 1, please go to the Adobe PDF version of the report on the
TIGTA Public Web Page.

This review was performed at CI Headquarters in Washington,
D.C., and the Small Business/ Self-Employed Division National Fraud Program
Office in New York, New York, during the period December 2011 through September
2012. We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we plan
and perform the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objective. Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I. Major contributors to the report are listed in Appendix II.

Fraud referrals made to CI in Fiscal Year 2012 resulted in
notable contributions to tax administration. With continuing emphasis on the
Fraud Referral Program as one of the key sources of high-impact tax fraud
cases, the number of fraud referrals increased more than 7 percent from Fiscal
Years 2011 to 2012, and the number of accepted referrals increased by nearly 5
percent. Other notable results included:

Subject Criminal Investigations increased by 7.1 percent.

Prosecution recommendations increased by 3.9 percent.

Convictions increased by 11.8 percent.

The average number of months to serve per conviction
increased by 16.7 percent.

CI’s Fiscal Year 2012 Annual Business Plan continued to stress
the importance of delivering high‑impact investigations by working
closely with the other IRS operating divisions to address significant cases of
tax fraud abuse. Figure 2 shows CI’s Business Performance Review data for the fraud
referral inventory and results for Fiscal Years 2011 and 2012.

CI management attributed the increase in the number of fraud
referrals received to CI’s outreach efforts with other IRS operating divisions,
biannual compliance council meetings, and assistance in advisor training
development and delivery. For example, CI field office special agents provide
outreach presentations to groups within a geographic Territory. In general,
these presentations consist of general information about the indictors of fraud
and CI’s role in the fraud referral process. Additionally, CI management stated
that CI partners with the local operating divisions by holding Compliance
Counsel Meetings at least semiannually to obtain input on the training and
presentations that the operating divisions would like CI to provide.

The National Fraud Program Office has approximately 80 advisors
who also provide fraud awareness presentations to IRS compliance employees in
the various operating divisions. The presentations include topics such as
interviewing skills and various techniques to examine tax returns and identify
possible indicators of fraud. The Program Office provided fraud outreach
presentations and training to more than 17,000 compliance employees in Fiscal Year
2011 and to almost 16,000 compliance employees in Fiscal Year 2012.

To determine the types of fraud issues that were referred to
CI, we selected and reviewed a stratified random sample of 127 (86 accepted and
41[5]rejected fraud referrals) of
the 1,583 fraud referrals made during Fiscal Years 2009 through 2011. Our
analysis showed that the Small Business/Self-Employed Division initiated the vast
majority of fraud referrals to CI and that most were related to individual tax
returns, which indicates that these taxpayers are either fully or partially
self-employed or small business owners. The fraud referrals in our sample generally
included multiple suspected fraudulent issues, most commonly involving: 1) omitted
income, 2) failure to file or pay tax, or 3) evasion of payment.

When fraud referrals were not accepted, CI provided
thorough feedback

While a majority of fraud referrals were accepted and
worked, CI did not pursue all fraud referrals with a criminal investigation. When
CI did not accept a fraud referral for criminal investigation, CI special
agents provided thorough feedback to the operating divisions to support why the
fraud referrals were not accepted.

The IRM[6] requires that CI
issue a declination memorandum to the referring operating division’s advisor explaining
the reason(s) why a fraud referral was rejected. To determine whether CI was
providing the required feedback to the referring operating division’s advisor regarding
rejected referrals, we reviewed the declination memorandums for the rejected
fraud referrals in our sample. In all instances, CI special agents provided
thorough feedback to the operating divisions to support why the fraud referrals
were not accepted. Some examples of the specific feedback given to the operating
divisions included:

In addition, in 28 of the 41 declination memorandums in our
sample, CI specifically stated or indicated that civil actions could be
considered. For example, several declination memorandums contained the
specific wording “nothing was discovered during our review which would preclude
the assertion of civil fraud penalties.” Providing the referring compliance
employees with adequate feedback will help foster continual improvement in the
quality and sustainability of the fraud referral process.

The reliability of data CI used to determine the timeliness
of evaluating fraud referrals is questionable. CI management did not have
complete or accurate information available to make decisions because it used
incorrect and/or inappropriate data when analyzing its timeliness performance
measures. In addition, management did not establish goals for its timeliness
measures. Furthermore, CI employees did not always ensure that a criminal
investigation code was timely entered on the account of taxpayers under
criminal investigation. Such delays or omissions of the criminal investigation
code could lead to improper contact by other IRS employees and ultimately
compromise CI’s investigations.

It is important that a fraud
referral be timely evaluated so that either a criminal investigation can be
initiated or the suspected fraudulent issue can be pursued through the normal
examination or collection process before the statute of limitations expires. Using
data in the CIMIS, CI tracks two fraud referral timeliness performance
measures.

Average Elapsed Days Acted Upon. This is the average length of time it takes CI to make
the determination to either accept the fraud referral for criminal
investigation or return it back to the originating operating division to
resume processing.

Percentage Acted Upon in 45 Days or Less. This
is the percentage of CI’s fraud referral evaluations that meet the
timeliness criteria.[7]

Figure 3 shows that the “Total Number
of Fraud Referrals Reviewed” and the “Number of Fraud Referrals Reviewed Within
45 Days or Less” have increased over the last several years. However, the “Average
Elapsed Days Acted Upon” increased by 1.3 percent in Fiscal Year 2012, and
the “Percentage Acted Upon in 45 Days or Less” decreased by 0.3 percentage
points when compared to Fiscal Year 2011.

Source: IRS CI Business Performance Reviews dated
September 30, 2010, and September 30, 2012, and
CI provided data on the number of fraud referrals reviewed.

The reliability of data used to determine the
timeliness of evaluating fraud referrals is questionable

To determine if CI procedures for monitoring the timeliness
of its fraud referral evaluation period were operating effectively, we reviewed
the initiation date and closing date information for a sample of 127 fraud
referrals. Analysis showed that the data entered in
the CIMIS did not always match the field offices’ source documentation, for
example:[9]

The initiation dates did not agree[10]in 78 (61 percent) of
127 sampled cases. These discrepancies ranged from an actual of 49 fewer calendar
days than reported to 73 more calendar days than reported. When the
sample results are projected over the population of 1,583 fraud referrals,
we estimate that mismatches in the initiation date of greater than five
calendar days occur in 972 fraud referrals.[11] We are 95 percent
confident that the number of fraud referrals with errors in the initiation
date field of greater than five calendar days ranges between 843 and
1,102.

The closed status date or the Subject Criminal Investigation
date in the CIMIS did not agree with the source documents disposition date
in 97 (76 percent) of 127 sampled cases. These discrepancies ranged from an
actual of 27 fewer calendar days than reported to 504 more calendar days
than reported. When the sample results are projected over the population
of 1,583 fraud referrals, we estimate that mismatches occur in these
sources of data in 1,208 fraud referrals.[12]
We are 95 percent confident that the number of fraud referrals with errors
in the closing date field ranges between 1,095 and 1,321.

The discrepancies between the source documentation and CIMIS
information occurred because there are no controls to ensure that the dates are
properly recorded on the Forms 2797 and there is no reconciliation of the dates
on the Forms 2797 to the dates input into the CIMIS. According to the IRM,[13]
“Balanced performance measures and corresponding underlying metrics can be used
to identify and understand changes in performance and identify improvement options….
In general, it is best to ensure the validity and integrity of all measures to
ensure decision making is based on accurate, reliable data.” Office of
Management and Budget Circular A-11[14] further emphasizes
the importance of accurate measures and states, “In order to assess the
progress towards achievement of performance goals, the performance data must be
appropriately accurate and reliable for the intended use...significant data
limitations can lead to bad decisions resulting in lower performance or
inaccurate performance assessments.”

The CIMIS does not contain a data field to accurately
capture the end date of the evaluation period for accepted fraud referrals

Instead, the Subject Criminal Investigation date serves as
both the end of the referral evaluation period and the start of the Subject Criminal
Investigation.[15] Our analysis of the
discrepancies in the fraud referral disposition dates and the Subject Criminal Investigation
dates showed that the start of the criminal investigation (Subject Criminal Investigation
date in the CIMIS) was not always near the date the decision was made to accept
the fraud referral (disposition date).

Using the Subject Criminal Investigation date in the
timeliness measure can add considerable time to the evaluation period. As a
result of these inaccuracies and system limitations, CI management does not
have complete or accurate information available to make decisions affecting the
timeliness of the Fraud Referral Program.

CI management did not
establish goals for its fraud referral evaluation timeliness measures

CI management stated that a
specific goal for the “Percentage Acted Upon in 45 Days or Less” performance
measure has not been set, but CI strives to evaluate each fraud referral within
that time frame as prescribed in the IRM.[16] Management added that the goal for the “Average Elapsed
Days Acted Upon” should be close to the 45-day requirement established in the
IRM. CI also obtains periodic timeliness reports by field office to determine
which field offices are not meeting the time frame and to identify the
cause(s).

Management also stated that the
two timeliness performance measures are used internally for case inventory
planning, but they are not used for budget or resource allocation purposes. Nevertheless,
the results of these two timeliness performance measures are shared with the
IRS Oversight Board.

Goals or targets are essential to
performance measures because they:

Provide direction to program
management and employees about where and how the IRS desires to improve in
an area.

Allow meaningful evaluation of
progress because it is immediately clear whether the targets have been met
or little progress has been made.

Facilitate accountability for the
level of results achieved.

However, because these performance
measures are reported externally, we believe that the IRS should establish specific
goals to improve the timeliness of the fraud referral evaluation process.
Specifically, the IRS should compare actual results with quantitative, e.g.,
numeric, targets to report agency progress in delivering tax administration
responsibilities. Establishing goals is particularly important to both the IRS
and its stakeholders. Without these targets, the two timeliness performance measures
do not provide perspective about progress and improvements in the program. In
addition, such information assists IRS management and stakeholders in making
important program decisions.

Recommendations

The Chief, CI, should:

Recommendation
1: Stress the importance of
capturing the correct dates on the Forms 2797 and in the system used to
track fraud referrals. In addition, the IRM or policy guidance should include
a requirement to reconcile the data on a periodic basis.

Management’s
Response: IRS management agreed with this recommendation. On July
31, 2012, an updated Form 2797 was released and new policy guidance was
implemented regarding the reconciliation of fraud referral data. The relevant dates
are reviewed periodically by various headquarters and field review processes,
and each field office has appointed a coordinator who is responsible for
tracking the fraud referral from receipt until final disposition.

Recommendation
2: Modify the CIMIS or develop an
alternative method to capture all relevant dates of the fraud referral
evaluation period in order to calculate an accurate timeliness measure of the
fraud referral acceptance process.

Management’s
Response: IRS management agreed with this recommendation. A
request will be made to modify the CIMIS to capture two dates from the Form
2797: the date the referral was received by the field office and the date the
referral was accepted or declined by the field office. In the interim, CI will
issue a memorandum reminding all personnel of the CIMIS five-day timeliness
guidelines with respect to fraud referrals.

Recommendation 3:
Establish quantifiable numeric goals for the “Average
Elapsed Days Acted Upon” and the “Percentage Acted Upon in 45 Days or Less”
performance measures.

Management’s
Response: IRS management partially agreed with this
recommendation. IRS management agreed with the “Average Elapsed Days” portion
of the recommendation and has quantified these numeric goals in IRM Section
9.4.1.5.1.3.3. The field office has 30 business days (45 calendar days) to
accept or decline each fraud referral. Additionally, a special agent can
request an extension(s) to complete the evaluation of the fraud referral when
appropriate. Written extension requests are noted in the CIMIS by the field
offices.

IRS management disagreed with the
“Percentage Acted Upon” portion of the recommendation. CI’s policy is to
address each fraud referral in the 30-business-day (45-calendar-day) time frame,
excluding extensions. Setting a percentage acted upon goal could give the
field offices the impression that it is acceptable for a certain percentage of
fraud referrals to be evaluated in longer time frames, which is not the case.

Office
of Audit Comment: Although IRS management did not
agree to set a percentage goal for the “Percentage Acted Upon” performance
measure, their commitment to the policy of addressing each fraud referral within
the 30-business-day (45-calendar-day) time frame is acceptable and will help to
ensure that fraud referrals are expeditiously reviewed.

An analysis of 86 accepted fraud referrals sampled
showed that the *******2(e)******** was not always properly entered on
taxpayers’ tax accounts. The IRM[17] instructs CI employees to place an *******2(e)********,
on the taxpayer’s tax account(s) in the Master File once a fraud referral has
been accepted for i*******2(e)********.[18]*******2(e)****************
********************************2(e)**************************************************************************
2(e)******************************************
********************************2(e)**************************************************************************
2(e)************************************.

A*****2(e)*****should
remain on a taxpayer’s tax account(s) until either the taxpayer investigation
is*********************2(e)**************************************.

When a ***2(e)**** is required, it
should remain on the taxpayer’s tax account(s) until either the taxpayer
investigation is ****************2(e)**************************. Special
agents do not have **********2(e)****************** onto a taxpayer’s tax
account; therefore, a request is sent to CI’s*************************2(e)************
*****************************2(e)**************************************************************************2(e)*****************************************.
If there are any ***2(e)***that should be removed or added, the special agents
are expected to resubmit the request to have the taxpayers’ accounts updated.

From the 86 accepted fraud referrals sampled, seven
taxpayers (8 percent) did not have a **2(e)** properly entered onto their tax
accounts.[19] When our sample results are
projected to the population of 1,084 accepted fraud referrals, we estimate that
a **2(e)** was not properly entered on 88 taxpayers’ tax accounts during Fiscal
Years 2009 through 2011.[20] We are 95 percent
confident that the number of taxpayers’ tax accounts on which a **2(e)** was
not properly entered ranges between 37 and 139.

For the seven taxpayer tax accounts with no **2(e)**, we
requested that CI verify whether the special agent requested that **2(e)**. For
all but one taxpayer, the special agent had requested the**2(e)**; however, CI
could not determine why the requests were not completed by the*******2(e)*******.
After our inquiry to CI, the **2(e)** was added to the one taxpayer’s tax account
that was not initially requested and to three of the other taxpayers’ tax accounts.
However, as of the end of our review, a **2(e)** had still not been entered on
one taxpayer’s tax account, and the remaining two other taxpayers’ tax accounts
no longer needed a**2(e)**** *************2(e)************.

We also reviewed the tax account histories of these seven
taxpayers and found that in six of the seven taxpayers’ tax accounts, there was
account activity between the dates when the Subject Criminal Investigation was
initiated and when the **2(e)** was eventually added to the tax accounts. For
example, some taxpayers’ tax accounts had activities such as lien or levy actions,
notices sent to the taxpayer, or refundable credits and/or refunds generated. Although
we were unable to determine if the account activity might have jeopardized CI’s
investigation, the possibility existed because of the lack of the**2(e)**.

We analyzed the number of days it took to enter the **2(e)**
onto the taxpayers’ tax accounts for our sample. Because there is no
timeliness criterion in the IRM for entering the**2(e)**, we judgmentally
considered 30 calendar days as a reasonable time frame for this analysis. Using
the field office disposition date for comparison purposes, we determined that
it took more than 30 calendar days to enter the **2(e)** on 26 (30 percent) of
the 86 taxpayers’ tax accounts in our sample. When the sample results are
projected to the population of 1,084 accepted fraud referrals, we estimate that
a **2(e)** was not entered within 30 calendar days on 328 taxpayers’ tax
accounts.[21] We are 95 percent confident
that the number of taxpayers’ tax accounts on which a **2(e)** was not entered
within 30 calendar days ranges between 242 and 413.

Although special agents who are assigned fraud referral
cases are not the same employees who enter the **2(e)** on the taxpayers’ tax
accounts**2(e)** ***************** ************************2(e)** **************************
showing the input of the **2(e)**. Results of our analysis indicate that some
special agents are not thoroughly reviewing these reports to verify that a **2(e)**
was timely entered onto taxpayers’ tax accounts in their assigned inventory.
Delays in entering, or the omission of, the **2(e)** on the taxpayers’ tax
accounts could result in other IRS operating divisions contacting the taxpayers
and potentially jeopardizing CI’s ongoing investigations.

Recommendations

The Chief, CI, should:

Recommendation
4: Revise the IRM or policy guidance
to establish a time criterion to ensure that a **2(e)** is requested on a
subject of an investigation’s tax account(s) within a reasonable number of
calendar days after the decision to accept a fraud referral for an
investigation, i.e., the disposition date.

Management’s
Response: IRS management agreed with this recommendation. On
August 16, 2012, CI implemented additional control measures that require
submission of **2(e)** requests to the assigned *******2(e)****** via an
electronic mailbox. The *******2(e)******* standard operating procedures
require **2(e)** requests to be processed within **2(e)** of an electronic
submission into the mailbox. Confirmation of the **2(e)** postings is
forwarded back to the field office, notating that the account controls are in
place. *******************2(e)** **************** *****************
******************************2(e)** **************** ***********2(e)** *******************************************
***********************************************************************************2(e)**
****************************** ************************2(e)** *********************

Recommendation
5:
Issue a reminder to all CI personnel of the requirement to review the **********************2(e)************************
the timely input of the **2(e)** to every taxpayer’s tax account in assigned
inventory, as necessary.

Management’s
Response: IRS management agreed with this recommendation. A reminder
will be sent to the field offices to remind them of the importance of timely
submission of **2(e)** requests and the necessity to proactively ensure that the
**2(e)** control was actually posted.

The overall objective of this review was to evaluate CI’s
role in the IRS National Fraud Program’s[22]efforts to increase the
number of viable fraud referrals. In addition, we determined whether fraud
referrals were timely assessed within CI and whether sufficient feedback on
rejected fraud referrals was provided to the IRS operating divisions. To
accomplish this objective, we:

I.Evaluated CI and Nation Fraud Program efforts to increase the number of
viable fraud referrals received from the operating divisions.

B.Interviewed the CI
Acting Director, Global Financial Crimes, and the Fraud Referral Analyst to
determine what actions were taken to emphasize the importance of fraud
referrals to CI personnel.

C.Interviewed the Small
Business/Self-Employed Division’s National Fraud Program Office Chief, Fraud
Policy and Operations, and staff to determine what guidance and training was
available to increase or improve the quality of fraud referrals forwarded to
CI. We interviewed Large Business and International Division, Tax Exempt and Government
Entities Division, and Wage and Investment Division fraud liaison personnel to
determine the process for developing fraud referrals.

D.Reviewed
performance management literature and CI and National Fraud Program performance
goals.

II.Determined whether CI has instituted procedures to monitor the
effectiveness and timeliness of its fraud referral review process.

A.Reviewed
available CI guidance and documentation for monitoring fraud referrals received
from the operating divisions.

B.Obtained an
extract from the CIMIS of 1,583 fraud referrals that were either accepted or rejected
by CI during Fiscal Years 2009 through 2011. We consulted with a contracted
statistician who assisted with the sampling plan and the projections. From the
CIMIS extract, we selected a stratified random sample with two strataconsisting of 86 accepted fraud referrals and
41 rejected fraud referrals totaling127 fraud
referrals that were accepted or rejected by CI during Fiscal Years 2009 through2011.[23] We used a 10 percent expected
error rate, a 95 percent confidence level, and a ±5 percent precision
level. A stratified random sample was taken because we wanted to estimate the total
number of accepted and rejected fraud referrals that were not timely processed
from the population of 1,583 fraud referrals that were either accepted or
rejected by CI during Fiscal Years 2009 through 2011.

1.Reviewed
the fraud referrals that were rejected by CI and were returned to the
originating operating division to determine if the declination memorandum was
completed and provided sufficient information on why the referral was rejected.

2.Analyzed
the fraud referral documentation to determine the types of tax returns and
suspected fraudulent issues that comprised the fraud referrals.

3.Validated
the accuracy of the CIMIS data by comparing Form 2797, Referral Report of
Potential Criminal Fraud Cases, fraud referral information input to the CIMIS
to data on the Integrated Data Retrieval System.

4.Analyzed
the fraud referral documentation to determine if the decision to accept/reject
the fraud referral occurred within 30 workdays of receipt by CI.

5.Analyzed
fraud referrals that were accepted by CI to determine the amount of time that
elapsed between the fraud referral acceptance date and when the Subject Criminal
Investigation was initiated. In addition, we analyzed taxpayer’s tax account records
to determine the amount of time that elapsed between the fraud referral acceptance
date and the date the **2(e)** was input on the taxpayer’s tax account.

Internal
controls methodology

Internal controls relate to management’s plans, methods, and
procedures used to meet their mission, goals, and objectives. Internal
controls include the processes and procedures for planning, organizing,
directing, and controlling program operations. They include the systems for
measuring, reporting, and monitoring program performance. We determined the
following internal controls were relevant to our audit objective: IRS
policies, procedures, and practices for determining whether fraud referrals are
timely processed and monitored. We evaluated these controls by reviewing
source materials, interviewing management, and reviewing a stratified
statistically valid random sample of 127 fraud referrals that were either
accepted or rejected by CI during Fiscal Years 2009 through 2011.

This appendix presents detailed information on the
measurable impact that our recommended corrective actions will have on tax
administration. These benefits will be incorporated into our Semiannual Report
to Congress.

We selected and reviewed a stratified random sample with two
strata totaling 127 fraud referrals made during Fiscal Years 2009 through 2011.[24] Our analysis showed
discrepancies of more than five calendar days in the initiation date recorded
in the CIMIS and the received date annotated on the field office source
documentation in 78 (61.4 percent)[25]of the 127 fraud referrals in
our sample. To calculate the processing timelines of those fraud referrals, CI
management relied on the CIMIS data. However, we found that the supporting
field office source documentation contained inconsistencies for the initiation
date. The following factors were used in calculating the number of fraud
referrals estimated.[26]

We selected and reviewed a
stratified random sample with two strata totaling 127 fraud referrals made during
Fiscal Years 2009 through 2011. To calculate the processing timelines of the
fraud referrals, CI management relied on the CIMIS data even though some of the
supporting field office source documentation contained inconsistent closing
dates. Our analysis showed discrepancies in the closing dates recorded in the CIMIS
and the disposition date from the field office source documents in 97 (76
percent) of the 127 fraud referrals in our sample. The following factors were
used in calculating the number of fraud referral cases with discrepancies
between the closing dates recorded in the CIMIS and the disposition dates from
the field office source documents.

The total number of fraud referrals with discrepancies in
the overall population was calculated by determining the population for
each stratum then multiplying the stratum population by its unique error
rate and adding the results together.

The total population of fraud referrals made during Fiscal
Years 2009 through 2011 was 1,583. This was comprised of the accepted
stratum of 1,084 accepted fraud referrals and the rejected stratum of 499
rejected fraud referrals.

Multiplied the accepted stratum population by its error
rate (1,084 x .744), which resulted in 806 accepted fraud referrals with
discrepancies between the closing dates recorded in the CIMIS and the disposition
dates from the field office source documents.

Multiplied the rejected stratum population by its error
rate (499 x .805), which resulted in 402 rejected fraud referrals with
discrepancies between the closing dates recorded in the CIMIS and the disposition
dates from the field office source documents.

Added the accepted stratum results to the rejected stratum
results (806 + 402), which totaled 1,208 fraud referrals with
discrepancies between the closing dates recorded in the CIMIS and the disposition
dates from the field office source documents. We divided this total by three
to get the average number of discrepancies per year for the three years (Fiscal
Years 2009 through 2011) (1,208 / 3 = 403).

Projected over five years the number of fraud referrals with
inconsistent closing dates (403 x 5 = 2,015).

We selected and reviewed a stratified random sample with two
strata totaling 127 fraud referrals made during Fiscal Years 2009 through 2011
(86 accepted fraud referrals and 41 rejected fraud referrals). Our analysis of
the 86 accepted fraud referrals in our sample showed that seven taxpayers (8.1
percent) did not have a **2(e)** properly entered onto their tax accounts.[27] The following factors were
used in calculating the number of fraud referrals estimated.

Multiplied the 1,084 accepted fraud referrals in our
population by its error rate of 8.14 percent = 88 fraud referrals (29
annually (88/3)) for Fiscal Years 2009 through 2011.

Projected over five years the number of fraud referrals
with no **2(e)** (29 x 5 = 145).

A quarterly review by
an IRS operating division to report on its performance measures, business
results, employee and customer satisfaction, and other items of importance.

Compliance Employee

The staff in the IRS’s Collection and Examination functions whose
mission is to ensure taxpayer compliance through collecting delinquent taxes and
auditing tax returns to determine correct tax liabilities.

Criminal
Investigation Management Information System

A database that tracks
the status and progress of criminal investigations and the time expended by
special agents.

Disposition Date

The date CI
makes the decision to accept or reject a fraud referral. This date
should generally be within 30 workdays from receipt of the fraud referral;
however, extensions can be granted.

Fiscal Year

A
12-consecutive-month period ending on the last day of any month. The Federal
Government’s fiscal year begins on October 1 and ends on September 30.

Fraud Referral
Program

Aprogram
designed as apartnership between CI and the IRS operating divisions
to promote fraud awareness and facilitate fraud training.

Fraud Technical
Advisor

A Fraud Technical Advisor
serves as a resource person and liaison to compliance employees in all
operating divisions. The advisor plays a vital role in the development of a
potential fraud case. The advisor is consulted in all cases involving
potential criminal fraud, as well as those cases that have potential for a
civil fraud penalty. The advisor is available to assist in fraud
investigations and offer advice on matters concerning tax fraud to all
operating divisions.

Integrated Data
Retrieval System

IRS computer system
capable of retrieving or updating stored information. It works in
conjunction with a taxpayer’s account records.

Internal Revenue
Code

The codified collection
of United States laws on income, estate and gift, employment, and excise
taxes, plus administrative and procedural provisions.

The IRS database that
stores various types of taxpayer account information. This database includes
individual, business, and employee plans and exempt organizations data.

National Fraud
Program

Small Business/Self-Employed
Division function that provides oversight and direction for fraud policy and fraud
operations throughout the IRS.

Primary
Investigation

An evaluation of an
allegation that an individual or entity is in noncompliance with the Internal
Revenue laws and related financial crimes.

*******2(e)*******

CI function that identifies
and develops **2(e)** for the purpose of referring and supporting high-impact
criminal tax and related financial investigations. Among other
responsibilities, the ********2(e)************** are to maintain controls on all taxpayer accounts
under criminal investigation.

SUBJECT: Response To
Draft Audit Report—Actions Are Needed to Improve the National Fraud Program and
Accurately Reflect Criminal Investigation’s Fraud Referral Assessment Period
(Audit #201130040)

Thank you for the opportunity to respond to the above
referenced draft report. Criminal Investigation (CI) believes that the Fraud
Referral Program plays a vital role in ensuring tax compliance. We continue to
stress the need for our special agents to efficiently and effectively address
fraud referrals and to provide relevant and detailed feedback when a fraud
referral is rejected. We also continue to focus on improved outreach and partnerships
with our civil counterparts. These efforts are validated by your audit
findings.

Criminal Investigation’s legal source investigative
inventory has been strengthened as a direct result of increasing numbers of
fraud referrals. There is closer cooperation between CI, the National Fraud
Program (NFP), and field compliance councils. There has also been increased
NFP outreach including: presentations and training to more than 17,000
compliance employees in Fiscal Year 2011 and to nearly 16,000 compliance
employees in Fiscal Year 2012. These efforts have resulted in improved quality
of referrals and their subsequent criminal investigations, as demonstrated by
increases in the number of prosecution recommendations, the overall United
States Attorney Acceptance Rate, and the average months to serve on imposed
sentences.

The Fraud Referral Program remains one of CI’s
Operational Priorities in FY 2013 and we will continue to work closely with our
IRS counterparts in Small Business and Self Employed (SBSE), Large Business
& International (LB/I), Tax Exempt/Government Entities (TEGE), and Wage
& Investment (W&I) to strengthen the Fraud Referral Program and promote
fraud awareness. Our ongoing emphasis will ensure timely evaluation of fraud referrals.

Criminal Investigation has no objection to the overall
method of computation used by TIGTA to determine the various “measurable
impacts” on tax administration. Generally, we are in agreement that additional
data on processing dates would help provide a more accurate accounting of
elapsed time. As such, pending available funding, CI will seek changes to the
Criminal Investigation Management Information System (CIMIS) to accomplish
this. However, we do not believe the projected discrepancies in fraud
referral initiation and closing dates actually correspond to measurable tax
administration benefits. These dates are used by CI management only as
estimates of processing timeliness and not as definitive signs of success or
failure.

If you have any questions, please contact me or Deputy
Chief, Patricia Haynes at (202) 622-3200.

Attachment

The Chief, CI should:

RECOMMENDATION #1

Stress the importance of capturing the correct dates
on the Forms 2797 and in the system used to track fraud referrals. In
addition, the IRM or policy guidance should include a requirement to reconcile
the data on a periodic basis.

CORRECTIVE ACTION (S)

We agree with this recommendation. On July 31, 2012,
an updated Form 2797, Referral Report of Potential Criminal Fraud Cases,
was released and new policy guidance was implemented regarding the
reconciliation of fraud referral data. The relevant dates are reviewed through
periodic reviews by various headquarters (HQ) and field review processes and
each field office has appointed a coordinator who is responsible for tracking
the fraud referral from receipt until final disposition.

IMPLEMENTATION DATE

July 31, 2012

RESPONSIBLE OFFICIAL(S)

Not applicable.

CORRECTIVE ACTION (S) MONITORING PLAN

The IRS will monitor this action as part
of our internal management system of controls.

RECOMMENDATION #2

Modify the CIMIS or develop an alternative method to
capture all relevant dates of the fraud referral evaluation period in order to
calculate an accurate timeliness measure of the fraud referral acceptance
process.

CORRECTIVE ACTION (S)

We agree with this recommendation. A request will be
made to modify CIMIS to capture two dates from Form 2797: Number 9, the date
the referral was received by the field office, and Number 11c, the date the
referral was accepted/declined by the field office. In the interim, CI will
issue a memorandum reminding all personnel of the CIMIS 5-day timeliness
guidelines with respect to fraud referrals.

IMPLEMENTATION DATE

September 15, 2016

RESPONSIBLE OFFICIAL (S)

Director, Operations, Policy & Support

CORRECTIVE ACTION (S) MONITORING PLAN

The IRS will monitor this action as part
of our internal management system of controls.

RECOMMENDATION #3

Establish quantifiable numeric goals for the “Average Elapsed Days Acted Upon” and the “Percentage Acted
Upon in 45 Days or Less” performance measures.

CORRECTIVE ACTION (S)

We agree with the average elapsed days recommendation
and have quantified these numeric goals in IRM Section 9.4.1.5.1.3.3. The
field office has 30 business days/45 calendar days to accept or decline each
fraud referral. Additionally, a Special Agent can request extension(s) to
complete the evaluation of the fraud referral when appropriate. Written
extension requests are noted in CIMIS by the field offices.

We disagree with the percentage acted upon
recommendation. Criminal Investigation’s policy is to address each fraud
referral in the 30 business/45 calendar day timeframe, excluding extensions.
Setting a percentage acted upon goal could give the field offices the
impression that it is acceptable for a certain percentage of fraud referrals to
be evaluated in longer time frames, which is not the case.

IMPLEMENTATION DATE

March 20, 2012

RESPONSIBLE OFFICIAL (S)

No applicable.

CORRECTIVE ACTION (S) MONITORING PLAN

Not applicable.

RECOMMENDATION #4

Revise the IRM or policy guidance to establish a time
criterion to ensure that a **2(e)** is
requested on a subject of an investigation’s tax account(s) within a reasonable
number of calendar days after the decision to accept a fraud referral for an
investigation, i.e., the disposition date.

CORRECTIVE ACTION (S)

We agree with this recommendation. On August 16,
2012, CI implemented additional control measures that require submission of **2(e)**requests to the assigned *******2(e)***********via an electronic mailbox. The **2(e)**standard operating procedures require **2(e)** requests
to be processed within **2(e)** of an electronic submission into the mailbox.
Confirmation, of the**2(e)**, postings are forwarded back to the field office,
notating that the account controls are in place. **************************2(e)**************
***************************2(e)** *************************************

IMPLEMENTATION DATE

August 16, 2012

RESPONSIBLE OFFICIAL (S)

Not applicable.

CORRECTIVE ACTION (S) MONITORING PLAN

Not applicable.

RECOMMENDATION #5

Issue a reminder to all CI personnel of the
requirement to review the **********************2(e)******* **********2(e)** ***********
the timely input of the **2(e)** to every taxpayer’s tax account in assigned
inventory, as necessary.

CORRECTIVE ACTION (S)

We agree with this recommendation. A reminder will be
sent out to the field offices to remind them of the importance of timely
submission of **2(e)** requests and the necessity to proactively ensure the **2(e)**
control was actually posted.

IMPLEMENTATION DATE

July 15, 2013

RESPONSIBLE OFFICIAL (S)

Director, Operations, Policy & Support

CORRECTIVE ACTION (S) MONITORING PLAN

The IRS will continue to monitor this action as part
of our current review process.

[2]
Legal source investigative cases are part of the core mission of CI and
contribute to its efforts to support the IRS’s overall compliance goals and
enhance voluntary compliance with the tax laws to reduce the Tax Gap. The
Fraud Referral Program is a key source of high-income tax fraud investigations
and an important source of legal source income tax investigations.

[4]
For this item, the percentage figures shown in the “percentage change” column
are the difference in the percentage from one year to the next, not the
percentage change from one year to the next.

[5]
One fraud referral was incorrectly coded as rejected when it was actually
accepted. Following recognized statistical practices, the one incorrectly
coded fraud referral was left in the strata where it was originally placed,
which increased the rejected fraud referrals to 41.

[7]
IRM 25.1.3.3 (2) (Oct. 30, 2009) states that a determination of whether to
accept or reject a fraud referral should be completed within 30 workdays. A CI
representative stated that 30 workdays roughly equates to 45 calendar days,
which is how CI has titled the timeliness performance measure.

[8]
For this item, the percentage figures shown in the “percentage change” column
is the difference in the percentage from one year to the next, not the
percentage change from one year to the next.

[9]
We used either the Form 2797 or, if a date was missing from the Form 2797, we
referred to the field office’s monitoring log and used that date, if present.
If there were no dates on the Form 2797 or the field office’s monitoring log,
we accepted the dates in the CIMIS as correct.

[10]
We allowed five calendar days for the time to route and assign the referral to
a special agent in the field.

[11]
To project the results of our statistical sample, we used a 95 percent
confidence level, a 61.4 percent error rate, and an 8.18 percent precision
factor.

[12]
To project the results of our statistical sample, we used a 95 percent
confidence level, a 76.33 percent error rate, and a 7.13 percent precision
factor.

[15]
When a fraud referral is initially received in CI, a primary investigation is
started. If the fraud referral is accepted, it transitions from a primary
investigation to a Subject Criminal Investigation.

[18]
The **2(e)** requirement does not apply to nontax cases, such as currency
transactions or tax return preparer schemes. Regarding accepted fraud
referrals, a **2(e)** is to be entered on tax-related cases only.

[19]
Only 82 of the 86 accepted fraud referrals in our sample included tax-related
cases for which a **2(e)** was applicable. In our analysis, we followed
recognized statistical practices and treated the four nontax cases as correct;
therefore, those four cases are not factored into the seven exceptions for
which no **2(e)** was entered or the 26 exceptions noted later in this section
for which it took more than 30 calendar days to enter a**2(e)**.

[20]
To project the results of our statistical sample, we used a 95 percent
confidence level, an 8.1 percent error rate, and a 4.68 percent precision
factor.

[21]
To project the results of our statistical sample, we used a 95 percent
confidence level, a 30.23 percent error rate, and a 7.86 percent precision
factor.

[23]The 127 fraud referrals consisted of 86
accepted fraud referrals, 40 rejected fraud referrals, and one fraud referral
which was incorrectly coded as rejected when it was actually accepted.
Following recognized statistical practices, the one incorrectly coded fraud
referral was left in the strata where it was originally placed, which increased
the rejected fraud referrals to 41.

[25]
In discussions with a CI representative, we were told that when the fraud
referrals are forwarded to the CI field office, oftentimes these cases are not
immediately assigned to a special agent due to delays (e.g., someone on
leave, in training, in court) during the routing process. Therefore, there is
generally a short lapse before the fraud referrals are entered into the CIMIS.
Our analysis takes into account a five-calendar-day delay for fraud referral
initiation data to be entered into the CIMIS.

[26]
The calculation for the number of discrepancies in fraud referral closing dates
will not equal due to rounding.

[27]
Only 82 of the 86 accepted fraud referrals in our sample included tax-related
cases for which a **2(e)** was applicable. In our analysis, we followed
recognized statistical practices and treated the four nontax cases as correct;
therefore, those four cases are not factored into the seven exceptions for
which no **2(e)** was entered.